WIP Inventory: Definition, Examples & Management
When people think of inventory, they usually picture finished products sitting on shelves, ready to be sold. But there’s another important stage in the inventory lifecycle: work in progress (WIP).
WIP inventory represents goods that are partway through the production process. They’re no longer raw materials, but they’re not yet finished goods.
In this guide, we’ll cover what WIP inventory is, why it matters, examples from different industries, how it’s treated in accounting, and best practices for managing it.
This post on WIP inventory is part of our Inventory Management Fundamentals series, designed to help you optimise and enhance your ecommerce store.
What is WIP Inventory?
Work in Progress (WIP) inventory refers to partially completed goods that are still in the production process.
They’ve moved past the raw materials stage.
They’re not yet ready to be sold to customers.
Examples:
A hoodie that’s cut and stitched but not yet packaged.
Furniture that’s assembled but still waiting for finishing.
Electronics with components installed but not fully tested.
Why WIP Inventory Matters
WIP may not get as much attention as finished goods, but it plays a critical role in both operations and finance:
Financial accuracy → WIP impacts the cost of goods sold (COGS) and gross margin.
Cash flow forecasting → Understanding WIP helps businesses see how much capital is tied up mid-production.
Bottleneck visibility → High levels of WIP may indicate inefficiencies in production.
Supplier accountability → For ecommerce/private label sellers, tracking WIP ensures suppliers stay on schedule.
Examples of WIP Inventory
Different industries handle WIP in unique ways:
Manufacturing:
Cars on the assembly line missing final parts.
Clothing mid-stitching at a garment factory.
Wooden chairs awaiting sanding and paint.
Ecommerce / Private Label:
A batch of branded hoodies being manufactured overseas, not yet shipped.
A cosmetics line mid-formulation and packaging at a supplier’s facility.
Food & Beverage:
Dough prepared but not yet baked.
Wine or beer still in fermentation.
WIP Inventory in Accounting
From an accounting perspective, WIP is considered a current asset on the balance sheet. It reflects the value of items partway through the production process.
WIP includes:
Raw materials consumed.
Direct labor applied.
Allocated overhead costs (e.g., factory utilities, depreciation).
Formula for WIP Inventory
Beginning WIP → Value of unfinished goods carried over from the previous period.
Manufacturing Costs → Raw materials, labor, overhead added during the period.
COGM (Cost of Goods Manufactured) → The value of goods completed and moved to finished goods.
This calculation gives businesses the value of items still in progress at the end of a period.
Challenges with WIP Inventory
Tracking WIP isn’t always easy:
Complexity → Assigning value to partially finished goods can be difficult.
Supplier communication → Outsourced production often limits visibility into WIP.
Inflated asset values → Overestimating WIP can make a balance sheet look stronger than reality.
Inefficiencies → Too much WIP may signal bottlenecks, poor scheduling, or overproduction.
Best Practices for WIP Inventory Management
To get WIP under control, businesses can:
Get regular reporting → Ask suppliers or factories for WIP updates.
Integrate tracking systems → Use ERP or inventory management software that accounts for WIP.
Apply lean manufacturing → Keep WIP low by producing in smaller, more efficient batches.
Forecast demand accurately → Align production schedules with customer demand to minimize excess WIP.
Audit periodically → Spot-check WIP to ensure it’s valued correctly and moving through the pipeline.
The Role of Technology
Traditionally, WIP tracking was manual and accounting-heavy. Today, technology helps businesses gain visibility into work in progress:
ERP systems → Provide real-time WIP tracking across production stages.
Inventory Management Systems (IMS) → Help align raw materials, WIP, and finished goods.
AI-powered tools → Improve demand forecasting and production planning, reducing excess WIP.
👉 While Verve AI is focused on forecasting and finished goods replenishment for Shopify merchants, it’s part of the bigger picture: by accurately predicting demand, you reduce overproduction and minimize WIP.
Visualizing WIP in the Inventory Flow
A simple way to understand WIP is to look at where it sits in the inventory lifecycle:
Conclusion
WIP inventory sits between raw materials and finished products. It’s a key part of inventory management that affects operations, finance, and cash flow.
By tracking WIP properly, businesses can:
Improve financial reporting accuracy.
Spot production inefficiencies.
Reduce unnecessary working capital tied up in unfinished goods.
📌 Next Steps:
Explore our Inventory Report Example to learn how to track finished goods.
Read about Forecasting vs Demand Planning to align production with demand.
See how Verve AI helps Shopify merchants forecast demand and streamline replenishment.